Hector Sants, the chief executive of the UK Financial Services Authority has given a speech today (24 April 2012) highlighting the importance of good corporate governance and effective boards in regulating financial firms. Although this is a view widely held, this emphasise from the main UK regulator is telling. It is also one of his last speeches before leaving the FSA and has therefore been eagerly awaited. The full text of the speech can be found on the FSA’s website here.
Mr Sants does draw some interesting conclusions from the financial crisis and he says that “when you analyse those firms that failed during the crisis, one or more of five key indicators were evident:
- a dysfunctional board;
- a domineering CEO;
- key posts held by individuals without the required technical competence;
- inadequate ‘four-eyes’ oversight of risk; and
- an inadequate understanding of the aggregation of risk.”
Mr Sants is primarily looking at financial firms in his review as this is the ambit of the FSA, however these failings could be levelled at a huge number of firms the world over, in many different sectors. Yet it is cheering to see that a regulator is highlighting this as such a key point because in part, one suspects, that were the financial firms lead, other industries will be inclined to follow. Yet, both the importance and limits of a regulators role is well summarised by by Mr Sants:
Good governance and a strong culture are a necessity for maximising the likelihood of the right judgements being made by management. Regulators have a role to play in ensuring that firms have the right governance and culture. But I should stress that it is not for the regulator to determine the culture. Ultimately, however, even a successful regulatory regime will not be sufficient to ensure good outcomes. Crucially, firms need to have an appropriate culture and one which is focused on the firm delivering the right long-term obligations to society. The right cultures are rooted in strong ethical frameworks and the importance of individuals making decisions in relation to principles rather than just short-term commercial considerations. In particular, this means that when a regulator expresses a clear instruction then firms should not continue to resist for reasons of expediency and short-term gain.
Time will tell how much of a change in the approach of the FSA this speech actually leads to but I undoubtedlyapplaudthe sentiment and encourage you to read the full text of the speech if you have time.
This article was written by Nick Lindsay a director of Elemental CoSec. Elemental CoSec providescorporate governance and UK company secretarial services. This article is for informational purposes only and should not be relied upon as specific advice or acted upon without seeking legal advice.